The Substantial Bias from Ignoring General Equilibrium Effects in Estimating Excess Burden, and a Practical Solution
We show that under typical conditions the simple "excess-burden triangle" formula substantially underestimates the excess burden of commodity taxes, in some cases by a factor of 10 or more. This formula performs poorly because it ignores general equilibrium interactionsmost important, interactions between the taxed commodity and the labor market. Many prior studies have shown that general equilibrium interactions affect excess burden but have not appreciated the bias associated with ignoring these interactions or the quantitative importance of this bias. We derive an implementable alternative to the simple formula. This alternative formula captures interactions that the simple formula omits; as a result it is both unbiased and usually more accurate.
When requesting a correction, please mention this item's handle: RePEc:ucp:jpolec:v:111:y:2003:i:4:p:898-927. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Journals Division)
If references are entirely missing, you can add them using this form.